Minnesota's foreclosure wave moves upscale

In a report to be released today, the Minnesota Home Ownership Center in St. Paul said most of those who sought foreclosure counseling through its network last year held prime mortgages, not the subprime mortgages that launched the foreclosure wave. Half gave lost or reduced income as a reason.

It's a shift also occurring on the national level. The Mortgage Bankers Association said the national delinquency rate for prime mortgages in the fourth quarter of 2008 rose to 5.06 percent from 4.34 percent in the third quarter.

"As this recession has intensified, the face of this mortgage crisis has changed by 180 degrees," said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis. Job losses and other economic-related fallout are behind many foreclosures now, he said.

Anderson said the new wave of people unable to pay the mortgage often is middle-class families that most likely have two incomes. One loses a job and all of a sudden they can't afford their house. Or they are under water on their mortgage and can't refinance.

"It's going to be a whole new crop of people that really are not used to having to get into this sort of financial position," he said. "It's really an unprecedented recession in many ways."

The Minnesota Home Ownership Center -- a nonprofit organization funded by government agencies, corporations and foundations -- gathered information from the 11,809 homeowners who sought foreclosure counseling at 25 education and counseling centers throughout the state in 2008. Demand was so great that the center went from 20 to 72 full-time counselors statewide last year.

The center has a $2.3 million annual budget, much of which is "passed through" to its partner agencies, including those providing the counseling. It also provides educational resources to guide people on how to purchase a home.

The center's executive director, Julie Gugin, said the biggest surprise was that 60 percent of those seeking help at the center had prime mortgages, while only 37 percent had subprime. In 2007, 57 percent had prime, 43 percent subprime. Of those with prime mortgages last year, 27 percent were adjustable-rate mortgages, which can be riskier for the borrower.

Gugin said one reason those with prime mortgages sought help in greater numbers may be because they were able to afford their homes until circumstances changed, and they realize that there are options. That compares, she said, to "some homeowners in subprime loans who may recognize at some level that the home was not affordable from the beginning."

Gugin also said that low and moderate income homeowners were ahead of the curve in the economic downturn and were the first to lose their jobs and experience financial distress. What is happening now, she said, may be the second wave of the foreclosure problem.

Help available

Regardless of the reasons people needed counseling, the center said that counselors -- often by working directly with a lender -- were able to prevent foreclosures in 55 percent of the more than 9,000 cases in 2008 that have been wrapped up so far.

Of those who averted foreclosure, 86 percent were able to stay in their homes -- and most of those were able to bring their mortgages current, modify them or work out agreements with the lenders to reduce or delay payments.

Glen Wetterlund fits both categories. Laid off one year ago from a Twin Cities-area music store that was struggling because of the downturn, he started falling behind with his bills and the mortgage on the duplex he owns in northeast Minneapolis. He described it as a "cascade effect. Most people in my circumstances could relate because it's hard to pin down one certain factor for getting in trouble with mortgages. But basically, it's loss of income and the overall general economic downturn."

He tried contacting his mortgage company but "got a different person each time, and we'd have to reinvent the wheel all over again." Frustrated, he contacted the center, which directed him to one of its agencies, Minneapolis Neighborhood Housing Services, for foreclosure counseling.

The result: His mortgage rate was cut nearly in half and his late payments were pushed back until the end of the loan, which is at a fixed rate for five years. His payments will restart on July 1.

Among the report's other findings:

Why help was needed: Thirty-five percent cited reduction of income and 15 percent cited loss of income. After that, reasons were poor budget management, medical issues, increase in loan payment, divorce or separation and others.

Mortgage payments: The guideline for mortgage payments is generally that they should not exceed 30 percent of a household's gross income. But only 31 percent of those who sought help via the center fell into that guideline. Twenty percent were paying 30 to 40 percent; 17 percent were paying 40 to 50 percent; 23 percent were paying 50 to 75 percent and 9 percent were paying more than 75 percent.